An inventory strategy is a day-to-day methodology to follow for ordering, maintaining and processing items in your warehouse. For a small operation, inventory management is a fairly straightforward job to handle, but as your volume increases, you need a more established plan.
What is Inventory Strategy?
Your inventory strategy can be as simple as a few notes to yourself regarding what you’re going to order and how you’re going to order it to avoid shortages, or it can be a detailed, comprehensive policy manual with its own management structure and employee base. Inventory strategy is anything and everything that deals with inventory:
- Item Cost
- Inventory levels
- Warehouse layout
- Inventory control
- Inventory management software
And that’s just a short list. Inventory strategy determines precisely how your business stocks its shelves and how items flow through inventory.
Ordering and Shipping
Your ordering policy will be based on your inventory strategy, but you will also have to include variables such as your geographic region of operation, the level of demand your business is experiencing and your specific customer base. You will probably also want to layer on a little of your own personality and preferences as you make decisions about how to order, wherein you will likely rely heavily on your own experiences with any vendors you use. Some variables to consider when making ordering decisions are:
Turnover: On average, how many times will you reorder an item each year? For a toy store, that may be 20 times, for any type of seasonal item, that may be once, or anywhere in between.
Stock Buying: If you are the primary buyer for a product, do you do so yourself or do you hold auctions or other bidding processes to get the best prices?
Stocking: You need to decide on whether or not to stock any particular item. Some things you will want to have in stock all the time, like hand soap or greeting cards. Other things, like barbeque sauce or vitamins, you may want to stock only at certain times of the year.
Another thing you will need to decide is how to handle inventory management. Do you want to handle it all yourself, use warehouses you trust, or do you use a third party service?
Inventory Strategy Software
Strategy is a good word to use, because strategy is what you are doing as you make these decisions. Don’t agonize over every single thing. Take it one step at a time and then go on to the next. Inventory management software can be extremely helpful with things like inventory control, ordering and shipping. There are software solutions that integrate with your existing inventory, such as inventory control software, to make your inventory strategy as easy as possible to maintain. It’s good to remember, though, that the computer is not running your operation; you are.
Monitoring your inventory in order to prevent a shortage may be as simple as having a dedicated shelf-regulating table, crediting those who return items, or as complex as monitoring a video feed from a store’s security camera system to see who’s in the store, tracing that information to the shopping carts to see what’s in them, anticipating what customers will buy, then procuring those items before the shoppers get to the check-out.
Sometimes inventory control can be as simple as a pen and paper. If your business relies on a wedding ring, and a bride freaks out because she can’t buy one when she suddenly can’t find the one she bought 30 years ago, you might just keep a handwritten list of where your stores are and how to get into the store. You can imagine the business implications of someone having a list like that.
To avoid the hassles of an inventory strategy, and the inventory problems that go with it, some businesses opt for a virtual inventory and a virtual warehouse. There are some advantages to this, such as saving you from having to maintain a physical warehouse, and the fact that if you have items stored across the country, you can keep track of your inventory without an inventory strategy.
The biggest advantage you gain from an online inventory is that you can easily keep track of how many of an item you have without having to visit a private storage facility. You can find out how much you have and who has what at any time. You can also do away with staffing minimums or any other component of an inventory strategy. You can hire seasonal workers without any of the background standards you would normally require of them.
The biggest disadvantage of maintaining an online inventory is that you are running your business entirely online. Failure of any component of your network will immediately shut down your operation. Another disadvantage is that your system can be hacked, and then you will have to start from scratch.
The online inventory method of running a business is convenient and flexible. In order for an online inventory method to be feasible, you have to have a system up and running within a week and fully running within a month. The advantage to this is that you can make changes to your inventory strategy as needed without any great upheaval, while still being able to effectively control the flow of your inventory throughout your business.
A General Guide to Inventory Strategy
Asking yourself some standard questions can help you develop an inventory strategy.
Are you a wholesaler or retailer? Each of these business models require different inventory needs. A retailer will need a large volume of items in its inventories to cover the multitude of potential orders it might receive, while wholesalers will need a smaller volume in order to be able to cleanly supply multiple retailers at once.
Do you sell seasonal items? If you do, then you will want to make sure your inventory strategy can accommodate large changes during the year. This may include adding seasonal items to your already existing inventory, installing additional racks or shelves, or moving your position in the warehouse.
What kinds of problems have you experienced in the past? This gives you an idea of what you might run up against in the future. For example, if you have been under-stocked during the holidays in the past, then it is a good idea to over-stock during the holidays this year. You can also take precautions to help prevent bad experiences, such as not putting all of your items on a single pallet, or avoiding a traffic jam in your warehouse.
What kinds of problems do you think you are going to encounter? One of the most difficult inventory problems is when you run out of an item that is needed. This is a question you can’t really answer until you have been in business, but you can take some guesses.
Do you have the space to store an inventory that is large enough? Warehouse size is often overlooked as an issue, but it can be a show-stopper that could require you to rethink your entire inventory strategy. You may need to make an investment in expanding your warehouse.
Do you have the money to maintain an inventory that is big enough? Just as space might limit your inventory strategy, so too might your resources. If you don’t have enough cash flow to carry an inventory that is large enough, then you may have to downsize.
How often will you have to replenish orders? This isn’t necessarily a limitation on your inventory strategy, it is more of an operational consideration.
Do you have the right staff, materials and money to keep things working the way you want them to? This is something you will know before you begin implementing a strategy, but is a good question to ask yourself.
An inventory strategy like the aforementioned online inventory may be an excellent fit for your business. So, before you try to formulate a strategy that will make your life easier or your business more profitable, make sure to ask yourself these questions.
How to monitor inventory?
Place tags and labels on all of your products like a barcode label that can help you track and monitor inventory easily. This policy also helps in tracking the units as you move the inventory from the store to the warehouse. You can also use stickers or small tags to note any special information about products or incidents like destruction due to extreme temperatures. You can use a label maker to make tags and label inventory for better tracking and management.
For more monitoring and better management in your inventory system, you can opt for a barcode scanner system. Identifying products by using a barcode scanner allows you to keep an additional inventory while maintaining the integrity of the product at the request of the owner.
Inventory turnover rate
Inventory turnover measures how successfully a business sells its inventory. A high inventory turnover rate indicates that the business sells greater number of products. A low inventory turnover rate can be a sign of poor management and also indicate low productivity for the business.
Inventory turnover rate is a general term that is frequently used to refer to any business that manages inventory truly.
Some industries that may be encouraged to track this metric include car dealerships, printers, food stores, and machine tool manufacturers.
How to calculate inventory turnover
To calculate the inventory turnover rate, you simply divide cost of goods sold by average inventory.
Cost of goods sold Ã· Average Inventory turnover rate
Let’s say a business spent $2 million dollars on inventory and $1 million on sales. Its turnover rate would be $2 million ÷ $1 million, or $2,000,000/ $1,000,000, or 2.0.
The inventory turnover number signifies that the business requires inventory turnover twice per year. In other words, the company has enjoyed two separate occasions to sell out its inventory.
Small businesses can reduce their risk by:
- Staying informed on news relating to their business, such as sales, downsizing, re-organization, etc.
- Creating a floor plan that’s flexible
- Working with a professional organization consultant to identify and control inventory-related risks
- Developing a policy to safeguard assets and prevent violations
How to Evaluate Inventory Profitability
The key to analyzing inventory profitability is to determine the best practices for the unique needs of a company. Simple formulas that can evaluate inventory can include calculating labor costs and capital requirements as well as adding them to a current inventory cost and then dividing the sum by the current inventory valuation to determine the net profit from the inventory.
There are also other kinds of formulas that can be used as well, such as first-in, first-out (FIFO) and last-in, first-out (LIFO). FIFO is an accounting method for valuating inventory, in which the cost of goods is determined by the first units acquired, while LIFO measures valuations based on the last goods acquired. Using the formulas and formulas above can help you determine the best method to employ for your company’s inventory evaluation.
Superior offers a reliable stock management system that helps you evaluate and store your inventory at the right place. The stock management system offers you a wide range of benefits, including the accelerated increase in sales and earnings due to efficient and controlled management of your inventory.